BIR Ruling [DA-262-01]

December 18, 2001 BIR RULING [DA-262-01] 22 (B), 27 (A), 196, 57 (B) DA-192-2001 Laguna Properties Holdings, Inc . 4th Floor, Makati Stock Exchange Ayala Avenue, Makati City Attention: Attys . Renato O . Marzan and Arlene B . Montero Gentlemen : This refers to your letter dated August 27, 2001 quoted as follows: "On behalf of Laguna Properties Holdings, Inc. ("LPHI") and PF Prime Properties, Inc. ("PFPPI"), we respectfully request your confirmation that the joint venture for construction between LPHI and PFPPI will not create a taxable joint venture under Section 22(B) of the Natio nal Internal Revenue Co de of 1997. " Background "PF Prime Properties, Inc. is a corporation duly organized and existing under the laws of the Philippines with principal place of business at 32/F Tower One Ayala Avenue, Makati City, while Laguna Properties Holdings, Inc. is a corporation duly organized and existing under the laws of the Philippines with principal place of business at the 4th Floor, Makati Stock Exchange Building, Ayala Avenue, Makati City. "PFPPI is the absolute and registered owner of a parcel of land located in Sta. Rosa, Laguna, with an aggregate area of One Hundred Thousand Seven Hundred Twenty Four (100,724) square meters, registered under Transfer Certificate of Title No. 205035 with the Register of Deeds of Sta. Rosa, Laguna land (hereinafter referred to as "Gross Parcel"). "PFFPI and LPHI entered into a Joint Development Agreement ("JDA") for the development of a residential subdivision on a portion of the Gross Parcel owned by PFPPI. Under the JDA, the parties agreed, among others, as follows: (1) PFPPI will contribute One Hundred Thousand (100,000) square meters (hereinafter referred to as "Project Land Area") of the Gross Parcel of land situated in Sta. Rosa, Laguna, as the site of the Project, while LPHI will contribute all costs, expenses, and skills in the development, construction and; (2) In return for their respective contributions to the Project, PFPPI and LPHI shall receive their respective allocations of the project in proportion to their respective interests in the Project, such allocation to be determined as follows: PFPPI shall be entitled to such number of Saleable Housing Units and Saleable Lots of the Project Land Area equivalent to 20% of the gross selling price of each Saleable Housing Unit and Saleable Lot within the Project Land Area; LPHI shall be entitled to such number of Saleable Housing Units and Saleable Lots of the Project Land Area equivalent to 80% of the gross selling price of each Saleable Housing Unit and Saleable Lot within the Project Land Area. Based on Section 1.1 of the JDA, the terms " Saleable Housing Units" and "Saleable Lot" are defined as follows: "Saleable Housing Unit" means a housing unit and the lot on which it is constructed, which shall be offered for sale to the public at a purchase price to be fixed by LPHI. Each Saleable Housing Unit shall be of a specific type and model based on plans and specifications to be prepared by LPHI, approval by PFPPI of such plans and specifications shall not be required. "Saleable Lot" means a subdivided portion of the Developed Properties which shall be offered for sale to the public as a residential lot. The term "Saleable Lot" shall exclude the area required by the applicable statute or regulation to be reserved for roads and open spaces, or for the area to be used for the establishment and operation of facilities, structures or utilities intended or required to be set aside for common use under a subdivision plan, and the area occupied by a river, creek, or canal flowing through the Project Land Area and the applicable easement constituted under the law in relation thereto. The parties will enter into an Allocation Agreement for purposes of allocating to PFPPI its 20% share, and to LPHI its 80% share of the Saleable Housing Units and Saleable Lots of the Project Land Area. DHEcCT (3) LPHI as developer of the Project shall be responsible for overseeing and coordinating the performance of all necessary work for the construction, development and completion of the Project, including: a. preparation, review, evaluation and approval of the Site Development Plan, the Project name and concept, including the project schedules; b. securing all the necessary government regulatory permits and licenses for the development of the Project Land Area into a residential subdivision. c. reviewing and approving all change orders, architectural, engineering, design and landscape plans and detailed design guidelines and construction drawings; d. evaluation and selection of the architect, general contractor, suppliers, quantity surveyor, specialty contractors, consultants and other parties for the implementation and completion of the Project; e. bidding of Project work packages, evaluation of bids, negotiation of terms and conditions for awarding of bids, acceptance of bids, negotiation and acceptance of contracts, execution and delivery in LPHI's name of all contracts for Project work packages; f. purchasing of owner-supplied materials and supplies in the construction of the Project; g. providing and obtaining all the necessary financing required for the construction, development and completion of the Project in accordance with the Site Development Plan and other project specifications, including payment of taxes, bonds, insurance, salaries and compensation and other liabilities and for the processing and settlement of all bills relating to the cost of the construction and development of the Project in accordance with project specifications. (4) Subject to section 3.1 of the JDA, PFPPI shall retain title to and ownership of the common areas of the Project. Thereafter, through a Deed of Conveyance, PFPPI shall turnover to the homeowners' association of the Project or (as applicable) the local government of Sta. Rosa, Laguna title and ownership of the common areas of the Project without monetary consideration. Based on the foregoing, you now request for a confirmation of your opinion that: 1. Pursuant to Section 22 (B) of the Ta x Code o f 1997, the Joint Development Agreement (JDA) between PFPPI and LPHI for the development of a residential subdivision in Sta. Rosa, Laguna will not create a separate taxable joint venture. However, the co-venturers, PFPPI and LPHI, will be separately subject to the regular 32% corporate income tax on their respective taxable income during each taxable year derived by them from the aforesaid construction project; 2. The allocation between PFPPI and LPHI of the Saleable Housing Units and Saleable Lots of the Project in consideration of their respective contribution in the Project, as stipulated in the JDA, is not a taxable event and is not subject to income and/or withholding tax, because the allocation is a more return of capital that each has contributed to the Project; 3. The Allocation Agreement whereby PFPPI and LPHI will allocate unto each other their respective shares in the Saleable Housing Units and Saleable Lots of the Project, in consideration of their respective contributions in the Project, is also not subject to income tax/withholding tax and to documentary stamp tax imposed under Section 196 of the Ta x Code o f 1997, because the allocation is made without monetary consideration and is not in connection with a sale. Instead, the allocation agreement will be entered into by PFPPI and LPHI merely to segregate the allocated Saleable Housing Units and Saleable Lots between the parties, as the return of capital which each contributed to the Project. The Allocation Agreement is only subject to the P15.00 documentary stamp tax imposed under Section 188 of the Ta x Code o f 1997. 4. The Deed of Conveyance to be executed between PFPPI and the Project's homeowners' association and/or the local government of Sta. Rosa, Laguna (if applicable) wherein PFPPI will convey title to the common areas of the Project without consideration is not subject to income tax, creditable/expanded withholding tax and documentary stamp tax under Section 196 of the Ta x Co de because the conveyance is made without monetary consideration and is not connected with a sale. 5. In the event that PFPPI and LPHI subsequently sell any of their respective allocated Saleable Housing Units and Saleable Lots to such third parties as they may so wish, the gain that may be derived by either PFPPI or LPHI from such sale will be subject to the regular 32% corporate income tax under Section 27(A) of the Ta x Code o f 1997, and to the creditable/expanded withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. Moreover, the sale of the allocated Saleable Housing Units and Saleable Lots to third parties by PFPPI or LPHI shall be subject to 10% value-added tax pursuant to Section 106 of the Ta x Code o f 1997. The sale to third parties will also be subject to the documentary stamp tax imposed under Section 196 of the Ta x Code o f 1997. In reply, please be informed that Section 22(B) of the Tax Code of 1997, provides: "(B) The term corporation shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participation), associations or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. " General professional partnership " are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. P.D. No. 929 amended the definition of the taxable corporation as not to include joint venture formed for the purpose of undertaking construction projects. The reasons for such amendment are: (1) Local contractors contribute substantially to the development program of the country; (2) Local contractors are at a disadvantage in competitive bidding with foreign contractors in view of limited capital and financial resources; (3) In order to be able to compete with big foreign contractors, it may be necessary for them to enter into joint ventures to pool their limited resources in undertaking big construction projects; (4) To assist them in achieving competitiveness with foreign contractors, the joint ventures formed by them should not be considered an additional income tax lien. Considering that it is the intention of the legislature to exclude joint venture or consortium formed for the purpose of undertaking construction projects from the definition of taxable corporation, this Office is of the opinion as it hereby holds that the Joint Venture entered into by and between the landowner and the developer is not subject to the regular corporate income tax under Section 27(A) of the Tax Code of 1997. However, the construction service rendered by the developer shall be subject to value-added tax (VAT). The co-ventures did not convey or transfer their ownership or interest over their parcels of land when they contributed the aforesaid landholdings to the joint venture but merely pooled their resources to a common fund. These pooled resources are co-owned by the joint venture partners. The said contribution constituted their respective capital contributions to the joint venture project, therefore, such contribution is not a taxable event that will give rise to the payment of regular income tax/creditable withholding tax. The transfer is also not subject to VAT, since the transfer is not in the course of business but a capital contribution. The allocation of saleable area of the project between the Landowners and the Developers in consideration of their respective contributions, as stipulated in the Agreement is not a taxable event and is not subject to income tax or any withholding tax because the allocation is a mere return of capital that each has contributed. The Partition Agreement whereby the Landowners and the Developer will allocate unto each other their share in the saleable area in consideration of their respective contributions is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, income tax and any withholding tax because the allocation is made without monetary consideration and is not in connection with a sale. The partition is made merely to segregate the saleable area between the parties, as the return of the capital which each contributed. However, the acknowledgment to said Partition Agreement is subject to the documentary stamp tax pursuant to Section 188 of the Tax Code of 1997. The subsequent disposition by the co-venturers of the areas allocated to them, the gain that may be realized by them from such sale will be subject to the regular income tax rate under Section 27(A) of the Tax Code of 1997, and to the creditable withholding tax under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. Moreover, said sale shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997 based on the gross selling price or fair market value of the properties whichever is higher. Furthermore, the said sale shall likewise be subject to VAT, (BIR Ruling No. DA-192-2001 dated October 17, 2001) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. IDCcEa Very truly yours, (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service